The role of fiscal policy in Britain's Great Inflation

Abstract

a b s t r a c t a r t i c l e i n f oWe investigate whether the Fiscal Theory of the Price Level (FTPL) can explain UK inflation in the 1970s. We confront the identification problem involved by setting up the FTPL as a structural model for the episode and pitting it against an alternative Orthodox model; the models have a reduced form that is common in form but, because each model is over-identified, numerically distinct. We use indirect inference to test which model could be generating the VECM approximation to the reduced form that we estimate on the data for the episode. Neither model is rejected, though the FTPL model substantially outperforms the Orthodox. But by far the best account of the period assumes that expectations were a probability-weighted combination of the two regimes. Fiscal policy has a substantial role in this weighted model in determining inflation. A similar model accounts for the 1980s but this role of fiscal policy is much diminished.

Fiscal Policy, Monetary Policy and Price Volatility: Evidence from an Emerging Economy

“…The articles found that fiscal and monetary authorities could stimulate economic growth without endangering price stability. Fan, Minford and Ou (2016) explored whether the Fiscal Theory of the Price Level (FTPL) could explain the UK inflation in the 1970s. The result showed that fiscal policy had a substantial role in determining inflation.…”

Analisis Perilaku Inflasi 33 Propinsi Di Indonesia

“…Penelitian Coutinho (2012) menyatakan bahwa inflasi yang terjadi di Negara-negara Southern Mediterranean sangat dipengaruhi oleh defisit fiskal Negara. Mendukung penelitian Coutinho (2012), penelitian yang dilakukan oleh Fan (2016) memberikan hasil bahwa kebijakan fiskal mempunyai peran besar terhadap terjadinya inflasi di Inggris. Masih dari sektor riil sebagai penyebab inflasi, penelitian Cerra (2016) memberikan hasil bahwa harga minyak dunia sebagai produksi dari penerimaan negara terbukti berpengaruh terhadap tingkat inflasi di Venezuela.…”